JUDGMENT

Sethuraman, J.

1. The defendant in O.S. 51 of 1976 in the court of the District Munsif of Maduari town, is the appellant. The plaintiff filed the suit for recovery of a sum of Rs. 3,116 being the advance amount paid for purchase of a vacant site from the defendant on 30th January, 1975 for a sum of Rs. 22,680. The sale deed was to be executed within 4 months from that date and the balance amount was to be received before the Sub-Registrar. If the defendant fails to execute the document, he had to return the advance amount together with Rs. 3,116 as damages. Subsequent to the agreement, the plaintiff alleged that he made enquiries about the encumbrance on the property as a result of which it was learnt that the land was under some compulsory acquisition proceedings by the Government. The plaintiff informed the defendant about this and questioned his locus standi to sell the land. Suppression of the acquisition proceedings was alleged as a fraud committed on the plaintiff. Alleging that the defendant had no authority to sell the land in view of the pendency of acquisition proceedings and that the plaintiff had incurred heavy loss, the plaintiff came forward with the present suit claiming recovery of the said sum of Rs. 3,116 with interest at 12 per cent per annum. The defendant in his written statement contended that the agreement to sell the property fell through on account of the default of the plaintiff, that the amount has been paid as earnest money which could be forfeited and that in any event the plaintiff was not entitled either to return the amount or any damages by way of interest or otherwise. The trial Court held that the defendant had not committed any breach of contract and that on the other hand it was only the plaintiff who had done so. The amount was treated to be only as earnest money on deposit for the due performance of the contract and the said sum was therefore, held to be liable to be forfeited by the defendant in accordance with the terms of the contract. The result was that the suit was dismissed. The plaintiff filed an appeal which was disposed of by the learned Subordinate Judge, Madurai, by his judgment, dt. 21st November, 1977. The learned Subordinate Judge held that the sum of Rs. 3,116 was paid only as earnest money, that the defendant had committed breach of contract and that even assuming the plaintiff had committed breach, he was entitled to recover the money paid by him but not to any interest as and by way of damages. The result was that the suit was decreed directing the defendant to pay a sum of Rs. 3,116 to the plaintiff with interest at 6% per annum from the date of the appellate court's decree till the date of realisation. The suit as regards damages was dismissed.

2. The defendant has come forward with the present second appeal and at the time of the admission, the following substantial question of law was formulated--

Whether the lower appellate court having found that the amount paid under Ex.A.1 is only earnest money, is right in holding that the appellant will be entitled to retain if he proves damages?

It may be clarified at this stage that it is not in dispute that the sum of Rs. 3,116 was paid only as earnest money. The only question that requires to be considered is, whether the earnest money could be forfeited.

3. There are two decisions of the Supreme Court of India of the year 1969. The first decision is in Maula Bux v. Union of India A.I.R. 1970 S.C. 1955. In that case one, Maula Bux entered into a contract with the Government of India for supply of potatoes at the Military Headquarters in Uttar Pradesh area and deposited Rs. 10,000, as security for the due performance of the contract. He entered into another contract in 1947 to supply at the same place poultry, eggs and fish for one year and deposited a sum of Rs. 8,500 for due performance of the contract. The Government of India rescinded the contracts and forfeited the amounts deposited by the said Maula Bux. He filed a suit which ultimately reached the Supreme Court in appeal. The Supreme Court found Maula Bux was guilty of breach of contracts and that considerable inconvenience was caused to the Military authorities because of the failure on the part of the said Maula Bux to supply the goods. Yet the Government was directed to repay the earnest money. In the course of the judgment, their Lordships referred to the Privy Council decision in Chiranjit Singh v. Har Swamp A.I.R. 1926 P.C. 1. = 23 L.W. 172 (P.C.) wherein it was observed that earnest money was part of the purchase price when the transaction went forward and that it was liable to be forfeited when it fell through by reason of the fault or failure of the purchaser. An amount deposited as security for due performance of the contract for supply of goods could not, it was held by the Supreme Court, be regarded as earnest money, which was part of the purchase price. In that particular case, the amount deposited was treated as liable to be returned.

4. In Hanuman Cotton Mills and another v. Tata Air Crafts A.I.R. 1970 S.C. 1986, 1994, 1996 Hanuman Cotton Mills entered into an agreement for the purchase of certain aero-scrap for a sum of Rs. 10,00,000. Rs. 2,50,000 was paid at the time of the negotiations and the balance of Rs. 7,50,000 was also to be paid immediately. Subsequently the purchaser, i.e., Hanuman Cotton Mills, wanted to pay the balance in two instalments and it was agreed. However, the amount was not paid as agreed to and therefore, the seller forfeited the entire amount of Rs. 2,50,000, which according to it was earnest money and then cancelled the contract. The propriety of this cancellation and forfeiture of Rs. 2.50 lakhs was the subject-matter of the decision by the Supreme Court. In the course of the judgment, their Lordships pointed out that 'earnest' must be given at the moment at which the contract is concluded. It represents a guarantee that the contract will be fulfilled, or, in other words, 'earnest' is given to bind the contract. It is part of the purchase price when the transaction is carried out and when the, transaction falls through by reason of the default or failure of the purchaser. Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest (See Hanuman Cotton Mills case) A.I.R. 1970 S.C. 1986, 1994, 1996. While in Maula Bux's case A.I.R. 1970 S.C. 1955 at 1959, it was pointed out that if the amount was reasonable, forfeiture of earnest money did not fall within S. 74 , in Hanuman Cotton Mills case A.I.R. 1970 S.C. 1986, 1994, 1996 there was a reservation about expression of an opinion on the question whether the element of reasonableness can ever be considered regarding the forfeiture of the money. It is also noteworthy that the decision in Maula Bux's case A.I.R. 1970 S.C. 1955 at 1959 has been noticed in the later decision in Hanuman Cotton Mills case A.I.R. 1970 S.C. 1986, 1994, 1996.

5. One aspect of a difference between the two cases may be noticed at this stage. While the later decision in Hanuman Cotton Mills v. Tata Air Crafts A.I.R. 1970 S.C. 1986, 1994, 1996 proceeds on the basis that earnest money represents a guarantee that the contract will be fulfilled and that on failure of the guarantee, it could be forfeited, in the case of Maula Bux v. Union of India A.I.R. 1970 S.C. 1955 at 1959 it was pointed out that the amount deposited as security for guaranteeing due performance of the contract for supply of goods could not be regarded as earnest money as it was not part of the price. On a full and deep consideration of the two judgments, it appears that the case of Maula Bux v. Union of India A.I.R. 1970 S.C. 1955 at 1959 dealt with what was essentially a security deposit independent of the price, so as to be proceeded against in case of damages, and the case of Hanuman Cotton Mills v. Tata Air Crafts A.I.R. 1970 S.C. 1986, 1994, 1996 was only an earnest money of Rs. 2.50 lakhs which was part of the price of Rs. 10 lakhs and which could be forfeited, if the parties so agreed.

6. Subsequently, the Supreme Court was concerned with a similar problem in Union of India v. Rampur Distillery and Chemical Co. Ltd. A.I.R. 1975 S.C. 1098. In that case Rampur Distillery supplied to the Government of India a large quantity of rum which was found not conforming to the quality stipulated and was therefore, rejected by the Union of India. The security deposit of Rs. 18,332; which was kept by the Rampur Distillery for due performance of the contract was forfeited. When Rampur Distillery protested against this forfeiture, the matter was referred to arbitration and the arbitrator held that the Union of India was entitled under S.74 of the Indian Contract Act, to the award of only a reasonable compensation which was fixed at Rs. 7,333 and he directed the Union of India to refund the balance of Rs. 11,000 to the Rampur Distillery. The award was contested and the matter was brought before the Supreme Court on appeal by the Union of India. It was contended for the Government of India that the security deposit was taken from the respondents in order to ensure the due performance of the contract and that, the respondent having defaulted, the entire amount was liable to be forfeited. Dealing with this contention Chandrachud, J. (as he then was), observed as follows--

A similar contention was advanced before this Court but was rejected in Maula Bux v. Union of India 1970-1-S.C.R. 928. The appellant therein had entered into a contract with the Government of India for the supply of certain goods and had deposited a certain amount of security for the due performance of the contract. As in the instant case, it was stipulated in the contract there that the amount of security deposit was to stand forfeited in case the appellant neglected to perform his part of the contract. On the appellant committing default in the supply the Government rescinded the contract and forfeited the security deposit. It was held by this Court that forfeiture of earnest money under a contract for sale of property does not amount to imposition of a penalty. But where under the terms of the contract the party in breach has undertaken to pay a sum of money or to forfeit a sum of money which he has already paid to the party complaining of a breach of contract, the undertaking is of the nature of a penalty. It is important that the breach of contract caused no loss to the appellants. The stipulated quantity of rum was subsequently supplied to the appellants by the respondents themselves at the same rate. The appellants, in fact, made no attempt to establish that they had suffered any loss or damage on account of the breach committed by the respondents.

In the result, the Supreme Court rejected the claim of the Union of India to forfeit the security deposit.

7. These and other cases were considered by a Bench of this Court in the case of S. Natesa Mudaliar (died) and others v. T. Sulochana Ammal App. No. 232 of 1976 judgment dt. 21st March, 1980 = 93 L.W. 624. The learned Judges, Natarajan and Padmanabhan, JJ. observed--

No doubt, Maula Bax v. Union of India 1970-1-S.C.R. 928 and Union of India v. Rampur Distillery and Chemical Co. 1973 S.C. 1098 are cases where the security deposit was taken for the due performance of a contract. However, the principle is not in any way different from a case where there is a clause for forfeiture of earnest money paid under a contract of sale of property, movable or immovable. But in Maula Bux v. Union of India 1970-1-S.C.R. 928 the Supreme Court has clearly stated that forfeiture of a reasonable amount paid as earnest money does not amount to imposing a penalty, but if forfeiture is of the nature of penalty then S.74applies.

Again in the same judgment, the learned Judges further observed--

From the above discussion, the following principles emerge: whether the amount paid at the time of the contract for sale is treated as advance or deposit or earnest money S.74will be attracted; notwithstanding the clause for forfeiture of the said amount, the party in breach will be entitled only to a reasonable compensation subject to the maximum amount mentioned in the agreement for sale.

I would only take leave to add that this view obliterates the distinction between an advance, security deposit and earnest money and places a uniform obligation that in all these cases, forfeiture would have to pass through the test of S.74.

8. Following this judgment of the Bench, the question that arises in the present case is, whether there was an actual loss sustained by the defendant so that he could forfeit the whole amount of Rs. 3,116. The stipulation for forfeiture is not enough. There must be proof of damages. The plaintiff has pleaded that the defendant was guilty of breach of the contract, because he did not disclose the notification under the Town Planning Act. This notification was borne out by the encumbrance certificate, Ex.A1. The learned counsel for the appellant, Mr. T.R. Mani, contended that merely because there is some notification under the Town Planning Act it does not mean that there are pending acquisition proceedings as pleaded by the plaintiffs in the plaint. As pointed out by the court below if the notification under the Town Planning Act had been brought to the notice of the plaintiff at the time when he entered into the agreement then the plaintiff would have considered for himself whether it was worthwhile to purchase the property in spite of the notification. The Town Planning notification is intended as a fore-runner for compulsory acquisition of the land and therefore, at the earliest point of time, the land acquisition proceedings would follow. It is in these circumstances that the court below held that there was a breach on the part of the defendant. I see no reason to come to a different conclusion and hold that there was no breach of contract on the part of the plaintiff. Such a question would be one of fact, and would not be ordinarily open for review in a second appeal. On the basis that there is a breach of contract, the further question that requires to be considered is, whether the amount could be forfeited by the defendant. When the defendant himself is guilty of breach there is no question of any forfeiture. The plaintiff has stated in the plaint that though he is entitled to a further sum of Rs. 3,116 as damages, he is not making the claim. As far as the sum of Rs. 3,116 is concerned it is necessary to remember that the property agreed to be sold is immovable property. There is no proof of damages. If forfeited, the amount would be in the nature of penalty. The forfeiture would be bad. The court below has considered that there is no question of any damages by way of interest in favour of the plaintiff and therefore, has reversed the trial court's decree in so far as interest is concerned. There is no appeal or cross objections at the instance of the plaintiff on the question of interest. Having regard to the facts here, I consider that the court below acted rightly in directing refund of the sum of Rs. 3,116. There is therefore, no merit in the second appeal. It is accordingly dismissed and there will be no order as to cost.